IRAs offer something for everyone

RosemaryCarlson

NORTH PALM BEACH, Fla. (Bankrate.com) -- About this time of year, most people are looking for two things -- the first signs of spring and tax deductions.

"The Individual Retirement Account legislation allowed the average person a chance to put money in to a tax-advantaged account."
Bruce Grace,Morehead State University

Well, we can't help you spot a robin, but we can help you avoid some taxes and get a jumpstart on retirement too.

An Individual Retirement Account will provide you with tax advantages while you're saving for those retirement years. And even though it's 2001, you can still reduce that 2000 tax bill. That's because for many types of IRA's, you can contribute for 2000 right up until the April 16, 2001 tax deadline. Not only will such a contribution reduce your 2000 tax liability, but it will also put you on the road to a secure retirement income.

The IRA was originally developed in 1974 for those individuals not covered by a company pension plan. "The Individual Retirement Account legislation allowed the average person a chance to put money in to a tax-advantaged account," says Bruce Grace, a chartered financial analyst and assistant professor of finance at Morehead State University.

This is a considerable benefit for individuals no matter if they have company-established pension plans or not. "The Roth IRA may be even a better deal for those who think they will be in a higher tax bracket at retirement. The Education IRA gives families the flexibility to make tax-deductible contributions for the future education of their children," Grace added.

Since the original enactment of IRA legislation, several types of IRAs have been developed with a variety of characteristics that can meet your investment and retirement needs.

Traditional, tax-deductible IRA

Fully deductible for singles that earn less than $40,000 per year and married couples who file joint tax returns and earn less than $60,000 per year.

The maximum deductible contribution per year is $2,000 and can be made up until the deadline of the next tax year.

Even individuals who have company pension plans can take advantage of this IRA.

Profits and income from investments are not taxed until you retire and begin withdrawing funds.

You can withdraw funds, without penalty, when you reach age 59 1/2, and you must make withdraws after you reach 70 1/2.

If you have a non-working spouse, they can contribute $2,000 to an IRA also as long as the two of you together make at least $4,000 in annual income.

Traditional, non-deductible IRA:

If you make more than $40,000 as a single or $60,000 as a married couple, your IRA contribution will not be fully deductible.

You will still benefit by opening an IRA even if it is not fully deductible. Your profits and income from investments will not be taxed until you begin withdrawals no later than 70 1/2 years of age.

For both the deductible and non-deductible IRA, you will face a 10 percent penalty, plus taxes, if you withdraw funds before you are age 59 1/2 unless it's for extraordinary medical expenses.

Roth IRA

For 2000 returns, you can contribute up to $2,000 to a Roth IRA if you are single and make $95,000 or less or are married earning less than $150,000 in adjusted gross income. If you're single and make up to $110,000 or married and earn up to $160,000 you can still contribute, but the allowed amount is gradually reduced. Once you're over these limits, you can't put any money into a Roth IRA.

There is no tax deduction per se for Roth IRAs. Contributions are made with money that has already been taxed, so there is no immediate tax break. But when Roth money is taken out, it is a tax-free distribution.

This type of IRA is ideal for individuals who may be in a lower tax bracket now but anticipate being in a higher tax bracket at retirement.

You cannot take a distribution without penalty until at least five years after your first contribution. Distributions without penalty can be taken after age 59 1/2. If you are a first-time homebuyer or become disabled, you can take distributions earlier.

If you exceed the income limits you can neither contribute to nor roll over other IRA money into a Roth account. If you opened a Roth while you were under the income limits but then later earn more, your Roth account still will earn money tax free that you can take out later without tax implications, but no new contributions are allowed.

Education IRA

If your income is $95,000 per year or less and you're single, or $150,000 or less for a married couple, you can save $500 in an IRA per year per child. If you make $95,000 to $110,000 as a single filer or $150,000 to $160,000 as a couple, your education contribution is reduced. You need to do a worksheet to find out just how much.

If you have an education IRA for your child, you cannot then qualify for your child to obtain a Hope Scholarship or Lifetime Learning credit. But, if your income is too high to qualify for these programs, an education IRA might be a good choice for you.

If you think you won't qualify for the Hope Scholarship or Lifetime Learning credit programs but then you do, the beneficiary of the education IRA must withdraw the funds by age 30 and pay taxes and penalties on it. However, the education IRA can be transferred to a sibling or the beneficiary's child.

SEP-IRA (Simplified Employee Pension)

A company-sponsored IRA.

Under the SEP-IRA plan, an employer can contribute to an employee's existing IRA. The penalties for early withdrawal remain the same as with the traditional IRA. Contributions are deductible.

If you are a small business owner, contributions can't exceed the lesser of 15 percent of an employee's compensation or $30,000 per year. You must contribute the same amount to your employee's SEP-IRA as you contribute to your own.

SEP-IRA's are flexible for employers. An employer does not have to contribute every year. The contributions are tax-deductible.

SIMPLE IRA (Savings Incentive Match Plans)

Like the SEP-IRA, the SIMPLE IRA is company-sponsored.

As a small business owner, you can match each employee's pay up to 3 percent or $6,500, whichever is less.

If you are self-employed, you can deduct up to $6500 per year and contribute to the SIMPLE IRA plan. 3. SIMPLE IRA contributions are fully deductible.

Early withdrawal penalties are steep. The SIMPLE IRA plan has a 25 percent tax penalty during the first two years if you are under age 59 1/2 and 10 percent after the first two years.

Individuals now have a number of options to sock away money toward their retirement and toward their children's' education. Small businesses, which cannot afford to sponsor a 401(k) or 403(b), can also offer employees basic retirement plans established for the benefit of their employees.

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